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Treasury Weighs Fixes to Foreclosures Program

The Obama administration plans next week to revamp its $75 billion program aimed at sparing homeowners from foreclosure, streamlining the documents required of borrowers seeking lowered payments, according to financial industry executives and others who have met in recent days with Treasury officials.

The latest effort to accelerate the Making Home Affordable program — now widely viewed as a disappointment — comes as the administration faces growing pressure to do less for banks and more for households struggling with double-digit unemployment.

The changes by the Treasury Department are expected to include greater assistance for homeowners no longer able to make mortgage payments because their paychecks have shrunk, said banking industry representatives privy to the department’s deliberations who spoke on condition of anonymity for fear of alienating government officials.

The Treasury was still debating the method, these banking representatives said, looking at either direct cash assistance or a grace period in which borrowers could postpone payments. That component may not be announced next week, but would follow soon after.

Housing experts said the anticipated changes would probably cause mortgage companies to move more quickly to lower payments for borrowers, though perhaps at the cost of prolonging the foreclosure crisis. Requiring less documentation of borrowers’ incomes carries a risk of lending to people who simply cannot afford their homes, increasing the likelihood of subsequent delinquency.

“They are turning this from a legitimate program to try to save people who have the ability to hang on their homes into one that says, forget the willingness and ability to pay, let’s just postpone foreclosures,” said Edward Pinto, a mortgage industry consultant who served as chief credit officer at Fannie Mae in the late 1980s.

While declining to provide details, the Treasury confirmed its plans to alter the program at a meeting next week with mortgage companies — servicers, in industry parlance.

“We expect to issue guidance to servicers next week to expedite conversions of current trial modifications and provide guidance on documentation,” the Treasury’s assistant secretary for financial institutions, Michael S. Barr, wrote in response to a reporter’s questions. “We are continually reviewing our housing plan to ensure that it promotes stability.”

The changes to be introduced next week are unlikely to address what has emerged as a potent factor propelling a wave of foreclosures: the roughly 15 million borrowers who are said to be underwater, meaning that they owe more than their homes are worth. But the Treasury is actively considering ways to attack this problem, financial industry representatives said.

Many economists and mortgage experts have concluded that banks must ultimately forgive loan balances to restore equity to underwater borrowers. Otherwise, growing numbers will walk away from their homes and accept foreclosure rather than make payments on properties in which they no longer own a stake.

Photo

Homeowners looking for help with loan modifications flocked to an assistance program last month at the Jacob K. Javits Convention Center in Manhattan.Credit
Michael Nagle/Getty Images

The Treasury has resisted calls to push lenders to write off loan balances, concerned that such a course would either threaten the health of banks by forcing them to swallow billions of dollars in write-offs or cost taxpayers additional money.

The administration has instead focused on ramping up its existing program, which pays mortgage companies that lower mortgage payments. The vast majority of loan modifications to date have lowered payments by dropping interest rates while leaving balances untouched.

When President Obama outlined the program nearly a year ago, he said it would prevent three million to four million foreclosures by 2012. As of December, mortgage companies had modified 759,000 loans on a trial basis, typically lasting three to five months. But only about 31,000 homeowners had received so-called permanent loan modifications, which lower payments for five years.

“There’s a great degree of frustration about how this has been going,” said Alan M. White, a professor at Valparaiso University Law School.

The changes expected next week are intended to alleviate one roadblock: the voluminous paperwork mortgage companies must process to qualify borrowers for lower payments.

Homeowners complain that mortgage companies routinely lose their documents, forcing them to repeatedly resend files. Mortgage companies have acknowledged problems, while also blaming homeowners for failing to provide required documents.

The Treasury is likely to alter the program by making pay stubs an acceptable means of verifying income, rather than requiring tax documents, said the people close to the deliberations.

One reason that mortgage companies are having such difficulty processing paperwork, they acknowledge, is that they lack adequate experience. During the housing boom, major institutions like Countrywide (now part of Bank of America) and Washington Mutual (since folded into JPMorgan Chase) marketed themselves as easy lenders motivated to approve mortgages with little fuss. They specialized in mortgages that required little or no documentation, sometimes called liar loans, which led borrowers and mortgage brokers to exaggerate incomes and assets.

Some experts fear that the Obama administration is now so eager to slow foreclosures that it is willing to employ the same sorts of loose lending standards that delivered the crisis.

“It definitely does lead to the question, are they substituting liar loan modifications for liar loans?” Mr. Pinto said.

Consumer advocates welcomed the prospect of a new effort aimed at accelerating loan modifications, while questioning whether the proposed changes would be significant.

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Those seeking help with their mortgages had to wait for hours to see a counselor at the Javits Convention Center last month.Credit
Michael Nagle/Getty Images

“The results are dismal so far,” said Julia R. Gordon, senior policy counsel for the Center for Responsible Lending in Washington. “We need a game changer.”

Throughout the financial system and within government, a sense is taking hold that the only effective way to stem foreclosures is to write off loan balances.

“We realized early on that if we don’t include principal treatment, you just don’t get the buy-in from the borrower to stay with it,” said Paul A. Koches, general counsel for Ocwen Financial, a major mortgage company that claims conspicuous success in converting trial loan modifications to permanent arrangements.

As of mid-December, Ocwen had turned about 40 percent of its trial modifications into permanent arrangements, according to the Treasury. By comparison, JPMorgan Chase had converted only 4 percent of its trial loan modifications into permanent status; the rate was less than 2 percent at Bank of America.

Servicers merely collect mortgage bills for a fee. Most loans are owned by investors. They are increasingly inclined to accept losses by writing down loan balances in exchange for greater assurance that borrowers will be able to make payments.

“Investors are willing to put real money on the table toward refinancing borrowers from bad mortgages into good mortgages,” said Micah S. Green, a partner based in Washington at the law firm Patton Boggs, who represents a consortium of institutional mortgage holders.

The Obama administration has begun to consider a new push to reduce loan balances, while debating the proper mechanism, according to banking officials.

“They are looking at equity forgiveness,” said a financial industry executive who speaks regularly with Treasury officials. “There have been a lot of meetings on that.”

But the details are messy, requiring a complex balancing of competing interests. Not least, the owners of first mortgages are unwilling to accept losses by writing down loan balances unless the pain is shared by the owners of second mortgages.

Many second mortgages, including home equity loans, are owned by the very banks that are in the middle of determining whether and how to modify first mortgages — servicers like Bank of America and Chase. For them, taking losses on second mortgages would entail stripping away billions of dollars in assets from their balance sheets.

“The banks are kind of in denial that second mortgages aren’t going to get paid in full,” said Professor White of Valparaiso. “Treasury has to find a way to compel the banks to take a hit.”

A version of this article appears in print on January 22, 2010, on page B1 of the New York edition with the headline: Treasury Weighs Fixes to a Program to Fend Off Foreclosures. Order Reprints|Today's Paper|Subscribe